The Indian government is gearing up to roll out GST 2.0, a major overhaul of the Goods and Services Tax (GST) system, with the aim of simplifying taxation and reducing the burden on consumers. Government sources describe the proposed GST tax reforms as 'Next Gen GST', suggesting that the two-slab tax regime will eventually pave the way for a single sales/services tax rate, potentially by 2047.

Key Changes and Expected Benefits

The core of GST 2.0 involves a significant rationalization of tax slabs. The current structure, which includes rates of 0%, 5%, 12%, 18%, and 28%, is slated to be replaced with a simplified two-rate system, primarily featuring 5% and 18% slabs. A special rate of 40% will be applied to a limited number of luxury and sin goods such as tobacco.

According to reports, approximately 99% of items currently in the 12% slab will be moved to the 5% slab, and about 90% of goods under the 28% slab will be shifted to the 18% slab. Everyday essentials, including food, clothes, and biscuits, are expected to attract a GST of just 5%. Household appliances like refrigerators and televisions will likely be taxed at 18% instead of 28%, potentially boosting savings for middle-class families.

These changes are expected to have several positive impacts:

• Reduced prices: The rationalization of rates is projected to lower the prices of many everyday items, easing the burden on consumers.
• Simplified tax system: Fewer tax slabs should make the GST system easier to understand and comply with, reducing complexities for businesses.
• Increased consumption: Lower prices and a simplified system are anticipated to stimulate domestic consumption, providing a buffer against external economic shocks.
• Enhanced competitiveness: Experts believe that GST 2.0 will make Indian exports more competitive by addressing the inverted duty structure, where the tax rate on finished goods is lower than the rate on inputs. This will unlock crucial working capital.

The Finance Ministry reportedly began working on the rationalization plan on February 1, 2025, coinciding with the Budget announcement. The proposed changes have been sent to a group of state finance ministers for review, and the GST Council is expected to discuss the plan next month.

Political Reactions and Debate

Prime Minister Narendra Modi's announcement of GST 2.0 has been welcomed by experts as a timely and strategic move to strengthen the Indian economy. However, the announcement has also triggered political debate, with the Congress party claiming credit for the reforms.

Congress leaders argue that the government is belatedly acting on reforms that they have long advocated. They point to Rahul Gandhi's past calls for GST reform and limiting the rate to 18%, claiming that Modi's announcement validates their critique of the current system. Jairam Ramesh, Congress general secretary, stated that the party has been demanding a fundamental change in GST for over a year and included it in their 2024 Lok Sabha manifesto. He has demanded an official discussion paper on GST 2.0 to facilitate a wider debate.

The government has countered these claims, accusing the Congress of hypocrisy. Government sources stated that the Congress was not even present when the original GST was passed and that their current statements are obstructionist and against the common man. They argue that the Congress lacked the statesmanship to bring states together for GST when they were in power.

Impact on Specific Sectors

Several sectors are expected to benefit from the GST revamp:

• Real estate: While under-construction properties attract 5% GST (1% for affordable housing), construction materials like cement, steel, and paints face higher rates. The proposed changes could reduce costs for developers, but it remains to be seen whether these savings will be passed on to homebuyers.
• Consumer goods: The shift of most items from the 12% slab to 5% and from the 28% slab to 18% will likely lead to price cuts on various consumer goods, boosting demand.
• Other sectors: Textiles, fertilizers, renewable energy, automotive, handicrafts, agriculture, health, and insurance are also expected to benefit from the GST rate overhaul.

GST 2.0 is being positioned as a "Diwali gift" to the nation, with the expectation that the revamped system will be in place before the festival. While the political debate continues, the focus remains on the potential economic benefits of a simpler, more efficient, and less burdensome GST system.